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Article by DailyStocks_admin    (01-01-09 04:05 AM)

Filed with the SEC from Dec 18 to Dec 24:

Selectica (SLTC)
Trilogy increased its stake in Selectica to about 1.91 million shares (6.7%), from 1.76 million (6.1%) reported on Nov. 20.

BUSINESS OVERVIEW

BUSINESS OVERVIEW
We develop, market, sell and support software that helps companies with multiple product lines and channels of distribution to effectively configure, price, quote new business and manage the contracting process for their products and services. Our products enable customers to increase revenue and profit margins and reduce costs through seamless, web-enabled automation of the “quote to contract” business processes, which reside between legacy Customer Relationship Management (CRM) and Enterprise Resource Planning (ERP) systems. Businesses that deploy our products are able to empower business managers to quickly and easily modify and synchronize product, service and price information enterprise-wide to ensure proper margins and to stay ahead of changing market conditions. Over the past number of years, Selectica solutions have been successfully implemented at a number of companies such as IBM, Cisco Systems, Dell, Rockwell and GE Healthcare. However, these types of large system sales have declined significantly over the past several quarters due, we believe, to reduced IT spending, reluctance of customers to undertake large, custom project implementations, our target customers’ growing preference for smaller scale, more focused system implementations and increased competition from suite vendors such as Oracle, SAP and Ariba and point application software vendors like Comergent Technologies, Firepond and Trilogy.
In response to this development over the past year, we developed and introduced a “next generation” of application offerings including the On Demand/hosted software as a service product called Fastraq. These products utilize our state-of -the-art configuration and pricing technologies. These applications incorporate industry specific domain knowledge and offer high levels of capability in more flexible ways. We have also been focused on expanding our product footprint and value proposition by extending into the growing contract management and compliance market. We began to achieve this objective shortly after the close of fiscal 2005 with the acquisition of certain of the assets of Determine Software Inc. Determine contract management products along with Fastraq extend our business model by permitting us to offer a complete range of on-demand solutions for our customers. The Fastraq and Contract Management products are targeted at both large and medium-sized organizations interested in using application software to manage configurable product and service offerings, through automated pricing management, contract management, and compliance. Additionally, we entered into a joint sales and marketing agreement with a business partner, SalesTech, for the sale of new application products targeted at the Telecom, Financial Services and Insurance vertical markets in Europe and North America. These products consist of domain-centric applications developed by SalesTech powered by Selectica configuration and pricing engines and are targeted at large and mid-sized customers. These products will be sold by Selectica with the net profit of the joint sales and marketing activities shared by the two companies.
Concurrent with the development, marketing and sales of these new products, we will continue to develop, sell and support our existing platform products.

Additionally, in response to these business developments, we have worked to reduce our operating costs through the reduction of personnel and other costs. During fiscal 2006, we faced significant challenges as bookings of products underperformed and sales of the new products were minimal, as they were not released until the latter part of the calendar year. We expect our new bookings to continue to be challenged for at least the next two quarters as we transition to these new products, enter new markets and retool our sales force to sell our new products in new markets.
Selectica was incorporated in California in June 1996 and re-incorporated in Delaware in November 1999. Our principal executive offices are located at 3 West Plumeria Drive, San Jose, California, 95134-2111.
Industry Background

The Growth of Internet Commerce
Advances in computing and communications technology have enabled businesses to utilize the Internet as a technology platform to automate and improve business processes and generate revenue. The Internet has rapidly become one of the most important and fastest growing channels of commerce and communication. This has enabled companies to more broadly and cost-effectively deploy business applications making the most current applications, information and content immediately available to employees, business partners and consumers using a web browser. With a rapid pace of innovation and worldwide development, the Internet is being used for cost effective applications ranging from electronic commerce to VOIP telephony, streaming media and other forms of entertainment. The rapid growth of Internet usage and Internet enabled mobile video phones and other personal digital devices (PDA’s) combined with the rapid expansion of internet usage in developing nations such as India and China create an imperative for businesses to optimize their use of the Internet to compete in today’s world.

Challenges of Internet Commerce
The selling process for configurable products across multiple channels is complicated in numerous ways. One type of complication is product complexity, where the product has many possible features, with factors interacting with one another and with other factors to influence the performance or manufacturability of that item. Examples of complex products include networking and telecommunications equipment, automobiles, and computers. A second type of complexity is “needs” complexity, in which the product or service itself may be relatively simple, such as an insurance policy or a printer, but the factors that go into evaluating a specific customer’s needs and matching those needs with the optimal product or service may be complex. A third type of complexity comes from flexible or customized pricing and discount programs, including those based on the features of the product.
The completion of a complex sales transaction depends on a seller’s ability to identify and satisfy the full range of a buyer’s needs. In traditional sales, companies rely on trained salespeople to interact with customers, address customer needs, explain product features, and ultimately complete the sale. Historically, many electronic commerce web sites provided static collections of non-interactive content, and have had limited capability for assisting and guiding customers or sales personnel through a complex purchasing decision. The Internet affords businesses the ability to centralize and simplify complex selling processes and deploy a platform for aggregating, bundling, and pricing complex products and services across all sales channels.

The Opportunity to Order Gap
Companies seeking to improve their process for selling products and services have typically implemented CRM software and have sought to improve provisioning of their products and services by implementing ERP software. Historically, a significant gap has existed between the core functionality of CRM software and ERP software. CRM software typically manages sales campaigns, tracks collection and qualification of prospective customers and monitors the pipeline of existing sales opportunities. ERP software typically fulfills orders, in some instances automatically interacting with the supply chain, invoices customers and tracks accounts receivables and payments. In between the functionally of these two basic packages is a variety of back office business functions and processes which occur from the time a sales opportunity has been defined in the CRM

software to the time when an order is placed into the ERP system. Currently, most enterprises do not have an effective method of connecting a customer identified through its CRM system to a product the enterprise can deliver through its ERP system. This is referred to as the “Opportunity to Order” gap, and typically consists of the processes required to efficiently and accurately configure, price and quote a product or service for a potential customer and correctly deliver the order specifications for fulfillment and billing. Without a comprehensive Opportunity to Order solution, companies resort to methods for building and pricing customer quotes through a combination of spreadsheets and teams of sales representatives and engineers searching through product catalogs. Depending on the complexity of the products and variables, this can result in a significant error rate in customer quotes. These errors are typically the result of invalid or outdated configuration, pricing and/or quotation information, and often require expensive and timely customer service intervention before the order can be processed. The ability to accurately quote product and service offerings requires enterprises to enforce business rules such as maximum discounts, margin requirements and ensure that items quoted are available in the required time period. An ineffective system for matching customer needs to available products and services slows the sales cycle and may lead to customers having a poor experience. In addition, an inefficient system makes it difficult for a company to enforce its pricing and other rules for selling products or services to optimize the solutions offered to its customers. Similarly, most companies have not automated the contract management function.

Limitations of Existing Solutions
Businesses have generally attempted to address the challenges of complexity in the selling process by building in-house solutions. These solutions often require significant up-front development costs and lengthy deployment periods. Furthermore, due to the rapid pace of change in products and business processes, companies often find it difficult and expensive to maintain these systems and integrate new functionality and technologies. As a result, businesses have sought to implement third-party packaged applications. With respect to the opportunity to order gap, CRM and ERP providers have attempted to extend the functionality of their products or offer complementary modules that fill portions of the opportunity to order gap.
The current commercially available software, both from CRM and ERP vendors and from other companies with solutions that are designed to help companies address the challenges of complexity in the selling process, may have one or more of the following limitations. In general, the applications:

• have not been engineered for the Internet platform and, as a result, are not easily deployed across a broad range of Internet-enabled channels and/or devices;

• require significant custom programming for deployment and maintenance;

• provide a limited interactive experience; or

• employ application architectures that limit their scalability and reliability.
We believe there is a significant opportunity for software that leverages the Internet platform to enable companies to efficiently sell complex products and services and bridge the Opportunity to Order gap that exists between current CRM and ERP solutions.
Selectica Solutions
Selectica’s sales execution products are used by enterprises to bridge the Opportunity to Order gap between CRM and ERP solutions. Selectica’s software enables sales professionals, business partners and consumers to find solutions based on specific requirements, configure proposed solutions, and generate accurate quotes for purchasing complex products and services. Selectica’s products make it possible for enterprises to extend their business rules to the sales channel by enabling the buyer to rapidly obtain quotes that fall within parameters determined by the enterprise. These business parameters run the spectrum from the manufacturability of a product to the required margins on any given product or service. Selectica’s products enable these business rules to be easily modified and then provide instant transmission of the updated rules throughout the organization.

Selectica’s sales execution applications are designed to enable enterprises to easily develop and rapidly deploy an Internet sales channel that interactively assists their customers, partners and employees through the selection, configuration, pricing, quoting and fulfillment processes. Our software enables companies to leverage the Internet platform to deploy a selling application accessible via many points of contact including personal computers, in-store kiosks and mobile devices, such as PDAs and cellular phones, while offering customers, partners and employees an interface customized to meet their specific needs. Our products are built using Java technology and utilizes a unique business logic engine (KnowledgeBase), repository, and a multi-threaded architecture. This design enables the core of our solutions, the Configurator server, to reduce the amount of memory used to support new user sessions and to deploy a cost-effective, robust and highly scalable, Internet-enhanced sales channel.
Our sales application footprint was expanded in fiscal 2006 with the addition of contract management products. These Contract Management solutions are used by enterprises to manage their buy and sell side corporate commitments. Selectica’s software enables any and all corporate departments (e.g. Sales, Services, Procurement, Finance, IT and others) to model their specific contracting processes using the Selectica application, to manage the lifecycle of the department’s relationships with the counterparty from creation through closure. The Contract Management solution provides enterprises a comprehensive platform to aggregate and analyze enterprise-wide contract information, automate and accelerate contract related business processes, enforce contract compliance (e.g. Sarbanes-Oxley, STARK) and automate the contracting process from request through signature.
Working in conjunction with the Selectica Sales Execution solutions, the Contract Management solution can help link enterprise CRM and ERP applications. On the sell side, this includes enabling corporations to configure, price, quote, propose and contract any configurable products or solutions. On the buy side, the Contract Management solution can be integrated with an array of ERP, Product Lifecycle Management, Finance, Human Resources and other applications to maintain and manage the compliance between transactions and contractual terms.
Some of the major design benefits of our sales execution applications are described below:

Enables Selling Process to Support Key Business Goals
Our software helps companies ensure that all orders conform to specific criteria. For example, if a company had a minimum gross margin requirement for a given product, our solutions help to ensure that the features and options chosen will result in a product that meets the company’s margin objectives.

Shortens Sales Cycles
Generally, in a traditional sales environment for complex products and services, prospective buyers repeatedly interact with a seller’s sales force to determine an appropriate configuration and pricing. Our software is designed to enable companies to reduce the time required to convert interested prospects into customers in multiple ways, including:

• providing comprehensive product information to the customer or sales person at the point of sale without requiring interaction with product experts; and

• automating the pricing and configuration of complex products and services, thereby providing sales professionals and their customers with accurate, real-time information.

Ensures Accuracy of Quotes
Our software automates the delivery of quotes to customers. Only quotes that comply with all of the pricing and other rules applicable to a particular product or service can be generated by our products. This procedure makes certain that all quotes accurately reflect the business rules with respect to the quoted product or service. The benefits of accurate quotes include limiting the problem of informing a disappointed customer that the company cannot live up to its quote and eliminating the need for quotes to be reviewed by internal compliance teams within the organization. Many ERP systems permit users to enter inaccurate orders into their systems. Because these ERP systems are often linked directly to manufacturing, this can result in products, which either cannot or should not be assembled. Accurate quotes enable enterprises to avoid costly order rework by ensuring that only accurate orders are placed into the ERP systems. This also prevents or reduces concessions or write-offs by the sales force to compensate for cancelled or delayed orders. All of these benefits can significantly enhance profitability and customer satisfaction.

Provides a Comprehensive Solution that is Easy to Deploy
Our products provide the functionality for Internet platform selling in a single comprehensive solution. Our products have been developed with an open architecture that leverages data in existing enterprise applications, such as CRM and ERP systems, to provide an application that is both easy to develop and deploy.

Provides an Opportunity for Increased Sales
We enable sellers of complex products and services to reach and sell to additional customers by enabling them to better and more fully leverage the Internet as an effective sales channel. Our applications are designed for the Internet platform and enable companies and their business partners to sell over a broad range of Internet-enabled devices reaching a wider range of constituents.

Provides an Opportunity for Greater Revenue per Customer
Enterprises can use our solutions to perform real-time analysis and optimization to identify cross-selling and up-selling opportunities. For example, a prospective buyer of a computer may be prompted to consider additional features such as increased memory, or complementary products such as a printer, based on specific selections made. In addition, by enabling companies to build an easy-to -use selling channel that is always available to their customers, we provide companies with the opportunity to capture a greater percentage of their customers’ business.

Improves Efficiency of the Indirect Sales Channel
By using our products, companies can enable their channel partners, such as distributors and resellers, to access their selling tools and product information. This allows distributors and resellers to effectively sell complex products and services with less support from the company. It also improves order accuracy, which results in greater efficiency and increased customer satisfaction.

Enforces pricing policies
By using our rules based pricing engine, our solutions can enforce accurate pricing policies defined by the product marketing organization, preventing price erosion and rogue discounting. This ensures compliance up-front in the quoting process, reduces chances of pricing errors that lead to customer satisfaction issues or price erosion, and alleviates the need for manual intervention.

Enhances Customer Relations
Our software enables a seller of complex products and services to present each customer with different options based upon the customer’s specific needs. This customization of the selling process actively engages the customer in the decision-making process. Selectica’s platform also ensures that customers arrive at a product configuration that meets the business and manufacturing guidelines of that customer.

Reduces Costs of Ownership
An effective selling system requires the user to build a KnowledgeBase that captures all product configurations, price data and selling rules. Our platform allows users to build, tailor and maintain their KnowledgeBase without custom programming. It also reduces the need for expensive technical specialists and programmers to maintain and enhance their business applications.

The Selectica Contract Management solution provides several advantages:

Visibility and Control
Contracts are authored in the software or digitized into a repository. This enables the customer to centralize and standardize its lifecycle management processes providing better control, visibility, and compliance monitoring of all contracts.

Flexibility and Extensibility
The inherent design of the Selectica Contract Management application enables customers to model any process, regardless of whether it is a buy-side, sell-side or internal process. This is accomplished by the use of self-service tools that are not only used to configure the application initially but also to manage changes to the application in the future.

Leverages Existing Investments
Because the application is database independent and built on open standards architecture, it helps clients protect their investments in existing technologies and investments, from operating systems, to databases to application layers. Selectica’s Contract Management offerings can be deployed in two ways depending on the customer’s requirements; either as an on premise solution at the customer site or as a software as a service on demand out of the hosted data center. When deployed as a service, all the client needs is access to an Internet Browser. If deployed as installed software, the application resides on top of the client’s existing technology stack.

Easy Setup and Migration
The ability to easily import print-based documents from external sources using the built in eFax and bulk load capabilities to rapidly load existing contracts. The built-in, privilege enforced ad hoc reporting and integration capabilities are unique in the industry.

Time-to-Value
The on demand application can be activated for a client within two days. The modeling and configuration of client-specific processes can usually be accomplished within a few weeks and requires no rewriting of the base code. The installation is followed by a brief training session (usually one to two days) before the client becomes self-supporting.
Selectica Products
We offer a range of software solutions for sales execution and contract management.
The Sales Execution offering for large enterprises consists of core configuration software, and complementary development tools that come pre-packaged with our software, or are available separately. We also develop libraries to accelerate deployment of configuration and pricing engines by our services teams, partners and systems integrators. For large and medium enterprises in the Telecom and Insurance industry verticals, we offer the SalesTech application solutions powered by Selectica technology. For the Small-Medium enterprise, we offer an on demand application called Fastraq, which is available as software as service for CRM systems such as Salesforce.com.
The Contract Management offering is delivered on demand for a variety of markets and size of businesses and provides the ability to aggregate and analyze enterprise-wide contract information, automate and accelerate contract-related business processes, enforce contract and relationship compliance (Sarbanes-Oxley) and automate the contract process from request to signature. Additionally, we offer a suite of software designed for revenue centric processes for enterprises engaged in both buy-side and sell-side transactions. These solutions link CRM and ERP applications by enabling the configuration, pricing, quoting, and contracting of complex bundled products and solutions.

Our products are written with Java and Java components sold in binary form delivered on CD-ROMs or over the Internet. Our software engines and applications are designed to be flexible and can be deployed on a wide range of hardware and software platforms, including the popular MS Windows, Linux and several UNIX platforms. These applications take advantage of the cutting edge developments around Java 2 Enterprise Edition (J2EE) and other complementary technologies in application servers, user interface and data management technologies.

CEO BACKGROUND

James Arnold, Jr. has served as chairman and financial expert of the Company’s audit committee since 2003. Mr. Arnold has served as the Senior Vice-President and Chief Financial Officer of Nuance Communications, Inc. from September 2004 to July 2008. Prior to joining Nuance, Mr. Arnold served as Corporate Vice President and Corporate Controller of Cadence Design Systems. Prior to joining Cadence, Mr. Arnold held a number of senior finance positions, including Chief Financial Officer, at Informix Corp., now known as Ascential Software Corporation, and later acquired by IBM. Prior to joining Informix, Mr. Arnold served as Corporate Controller for Centura Software Corporation. Mr. Arnold worked in public accounting at Price Waterhouse LLP from 1983 to 1995, where he provided consulting and auditing services to companies in a broad array of industries including software, semiconductors, oil exploration & production, and banking. Mr. Arnold received a B.B.A. in finance from Delta State University and an M.B.A. from Loyola University in New Orleans, Louisiana.

Lloyd Sems was elected to the Board of Directors of the Company on June 2, 2008. Since October 2003, he served as President of Sems Capital, LLC and of Capital Edge, LLC, both of which he founded, Previously, Mr. Sems served as Director of Research and Portfolio Manager for Watchpoint Asset Management. Mr. Sems holds a Bachelor of Science degree in Business Administration and Finance from Albright College.

Brenda Zawatski has served as a director since November 2005 and as Co-Chairman since July 2008. Since July 2007, Ms. Zawatski has been providing consulting services to various companies. From January 2006 to July 2007, Ms. Zawatski served as the Senior Vice President of Sales and Marketing for Pillar Data Systems. Prior to joining Pillar, Ms. Zawatski was the Vice President of Sales and General Manager of Information Lifecycle Management Solutions at StorageTek, which was acquired by Sun Microsystems. Previously, Ms. Zawatski served as Vice President of Product and Solutions Marketing for VERITAS Software. Prior to joining VERITAS, Ms. Zawatski held significant roles at IBM as Vice President, Tivoli Storage Software; Vice President, Removable Media Storage Solutions; and Director of S/390 Enterprise Systems. Ms. Zawatski holds a B.S. in Accounting from Penn State University.


MANAGEMENT DISCUSSION FROM LATEST 10K

In addition to historical information, this annual report on form 10-K contains forward-looking statements that involve risks and uncertainties that could cause actual results to differ materially from those projected. Factors that might cause or contribute to such differences include, but are not limited to, those discussed in this Item entitled “Management’s Discussion and Analysis” and Item 1A entitled “Risks Factors Related to Our Business.” Actual results could differ materially. Important factors that could cause actual results to differ materially include, but are not limited to, the level of demand for Selectica’s products and services; the intensity of competition; existing and potential litigation: Selectica’s ability to effectively manage product transitions and to continue to expand and improve internal infrastructure; and risks associated with potential acquisitions. For a more detailed discussion of the risks relating to Selectica’s business, readers should refer to the section earlier in this report entitled “Risks Factors.” Readers are cautioned not to place undue reliance on the forward-looking statements, including statements regarding the Company’s expectations, beliefs, intentions or strategies regarding the future, which speak only as of the date of this annual report. Selectica assumes no obligation to update these forward-looking statements.

We develop, market, sell and support software that helps companies with multiple product lines and channels of distribution to effectively configure, price, quote new business and manage the contracting process for their products and services. Our products enable customers to increase revenue and profit margins and reduce costs through seamless, web-enabled automation of the “quote to contract” business processes, which reside between legacy CRM and ERP systems. Businesses that deploy our products are able to empower business managers to quickly and easily modify and synchronize product, service and price information enterprise-wide to ensure proper margins and to stay ahead of changing market conditions. Over the past number of years, Selectica solutions have been successfully implemented at a number of companies such as IBM, Cisco Systems, Dell, Rockwell and GE Healthcare. However, these types of large system sales have declined significantly over the past several quarters due, we believe, to reduced IT spending, reluctance of customers to undertake large, custom project implementations, our target customers’ growing preference for smaller scale, more focused system implementations and increased competition from suite vendors such as Oracle, SAP and Ariba and from point application software vendors like Comergent Technologies, Firepond, Trilogy, iMany, Upside Software, and Dicarta/Emptoris.
In response to this market shift, we developed and introduced a new generation of application offerings including the On Demand/hosted software as a service product called Fastraq. These products utilize our state-of -the-art configuration and pricing technologies. These applications incorporate industry specific domain knowledge and offer high levels of capability in more flexible ways. We have also been focused on expanding our product footprint and value proposition by extending into the growing contract management and compliance market. We began to achieve this objective shortly after the close of fiscal 2005 with the acquisition of certain of the assets of Determine Software Inc. Determine contract management products along with Fastraq extend our business model by permitting us to offer a complete range of on-demand solutions for our customers. The new Telecom and Insurance products, developed with a partner, are targeted at large and mid-sized customers. The Fastraq and Contract Management products are targeted at small to large businesses interested in using application software to manage configurable product and service offerings, though automated pricing management, contract management, and compliance. Concurrent with the development, marketing and sales of these new products, we will continue to develop, sell and support our existing platform products.
Also in response to these business developments, we have worked to reduce our operating costs through the reduction of personnel and other costs. During fiscal 2006, we continued to face significant challenges as bookings of platform products underperformed and sales of the new generation products were minimal, as they were not released until the latter part of the calendar year. However, bookings of our contract management products have increased significantly since the business was acquired. We expect new bookings to begin improving and currently expect to achieve profitability in the second half of fiscal year 2007.
Summary of Operating Results for Fiscal 2006
During the fiscal year ended March 31, 2006, the Company’s total revenues were $23.4 million of which 19% represented license revenues and 81% represented services revenues. Margins for the year were 86% and 55% for license and service, respectively. The total reduction in revenue was approximately $7.7 million over the fiscal year ended March 31, 2005, of which approximately $4.7 million and $3.0 million were license and service revenue, respectively. Additionally, operating expenses for the fiscal year ended March 31, 2006, were approximately $34.3 million, which was approximately $0.3 million lower than fiscal year ended March 31, 2005. The $0.3 million reduction included a $7.5 million payment to settle the patent infringement lawsuit with Trilogy Group. Excluding the $7.5 million one-time payment, the approximately $7.8 million reduction in operating expenses was primarily due to reductions in headcount. Net loss for the year was approximately $17.5 million or $0.53 per share.
Key Performance Indicators

Bookings and Revenue
Due to the nature and scope of our product implementations, we typically recognize revenue from contracts signed during a particular quarter (“bookings”) over several quarters or fiscal years.

Expense Management
Total annual expense levels for normal operations in fiscal 2006, which excludes non-cash charges, legal settlement and restructuring charges, were approximately $31.6 million. Total annual expense levels in fiscal 2005 for normal operations, which excluded non-cash charges and restructuring charges were approximately $43.3 million. This decrease in annual expenses, excluding non-cash charges, legal settlement and restructuring charges totaling approximately $11.7 million resulted from the reduction of head count and other expenses of approximately $1.1 million; however reductions were offset by the $7.5 million patent infringement lawsuit settlement with Trilogy and the associated increased legal expenses.
In January 2005, we reduced our headcount by 34 employees. This reduction represents an annual savings in personal expenses of approximately $3.4 million. We made an additional reduction in staff of 42 employees in May 2005. This second reduction represented an additional annual savings in personnel expenses of approximately $3.9 million.
Outlook for Fiscal Year 2007
Revenue is expected to increase slightly during fiscal 2007. Efforts are focused on increasing bookings during the year to resume growth beyond fiscal 2007, however, revenue recognized on such bookings will depend on the specific contract terms and conditions. We anticipate that the majority of customers for our contract management and Fastraq solutions will choose a hosted solution with revenue recognized over the length of the contract.
Additionally, management will continue to review the Company’s cost structure to minimize expenses and use of cash. The Company estimates it would take a charge of approximately $6.5 million in the second quarter of fiscal 2007 in connection with relocating its corporate headquarters. This action along with other cost-saving measures are expected to reduce the Company’s break-even point to approximately $6.2 million of quarterly revenue. The Company will also incur the additional expense of options as it relates to the adoption of SFAS 123R “Share Based Payment”, with such additional expense included in the Company’s break-even point. The Company currently expects to break even by the end of fiscal 2007.
Critical Accounting Policies and Estimates
We prepare our consolidated financial statements in conformity with accounting principles generally accepted in the United States. These accounting principles require management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements. Our management is also required to make certain judgments that affect the reported amounts of revenues and expenses during the reporting period. We periodically evaluate our estimates including those relating to revenue recognition, allowance for doubtful accounts, litigation and other contingencies. The methods, estimates and judgments we use in applying our most critical accounting policies have a significant impact on the results we report in our consolidated financial statements. We evaluate our estimates and judgments on an on-going basis. We base our estimates on historical experience and on assumptions that we believe to be reasonable under the circumstances. Our experience and assumptions form the basis for our judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may vary from what we anticipate and different assumptions or estimates about the future could change our reported results. We believe the following accounting policies are the most critical to us, in that they are important to the portrayal of our financial statements and they require our most difficult, subjective or complex judgments in the preparation of our consolidated financial statements:

Revenue Recognition
We enter into arrangements for the sale of: (1) licenses of software products and related maintenance contracts; (2) bundled license, maintenance, and services; (3) services; and (4) subscription for on-demand services. In instances where maintenance is bundled with a license of software products, such maintenance term is typically one year.

For each arrangement, the Company determines whether evidence of an arrangement exists, delivery has occurred, the fees are fixed or determinable, and collection is probable. If any of these criteria are not met, revenue recognition is deferred until such time as all of the criteria are met.
Arrangements consisting of license and maintenance only. For those contracts that consist solely of license and maintenance, the Company recognizes license revenues based upon the residual method after all elements other than maintenance have been delivered as prescribed by Statement of Position 98-9 “Modification of SOP No. 97-2 Software Revenue Recognition, with Respect to Certain Transactions.” The Company recognizes maintenance revenues over the term of the maintenance contract because vendor-specific objective evidence of fair value for maintenance exists. Under the residual method, the fair value of the undelivered elements is deferred and the remaining portion of the arrangement fee is recognized as revenue. If vendor specific objective evidence does not exist to allocate the total fee to all undelivered elements of the arrangement, revenue is deferred until the earlier of the time at which (1) such evidence does exist for the undelivered elements or (2) all elements are delivered. If unspecified future products are given over a specified term, we recognize license revenue ratably over the applicable period. The Company recognizes license fees from resellers as revenue when the above criteria have been met and the reseller has sold the subject licenses through to the end-user.
Arrangements consisting of license, maintenance and other services. Services revenues can consist of maintenance, training and/or consulting services. Consulting services include a range of services including installation of off-the -shelf software, customization of the software for the customer’s specific application, data conversion and building of interfaces to allow the software to operate in customized environments.
In all cases, the Company assesses whether the service element of the arrangement is essential to the functionality of the other elements of the arrangement. In this determination, the Company focuses on whether the software is off-the -shelf software, whether the services include significant alterations to the features and functionality of the software, whether the services involve the building of complex interfaces, the timing of payments and the existence of milestones. Often the installation of the software requires the building of interfaces to the customer’s existing applications or customization of the software for specific applications. As a result, judgment is required in the determination of whether such services constitute “complex” interfaces. In making this determination we consider the following: (1) the relative fair value of the services compared to the software; (2) the amount of time and effort subsequent to delivery of the software until the interfaces or other modifications are completed; (3) the degree of technical difficulty in building of the interface and uniqueness of the application; (4) the degree of involvement of customer personnel; and (5) any contractual cancellation, acceptance, or termination provisions for failure to complete the interfaces. The Company also considers the likelihood of refunds, forfeitures and concessions when determining the significance of such services.
In those instances where the Company determines that the service elements are essential to the other elements of the arrangement, the Company accounts for the entire arrangement under the percentage of completion contract method in accordance with the provisions of SOP 81-1, “Accounting for Performance of Construction Type and Certain Production Type Contracts” (SOP 81-1). The Company follows the percentage of completion method if reasonably dependable estimates of progress toward completion of a contract can be made. The Company estimates the percentage of completion on contracts utilizing hours and costs incurred to date as a percentage of the total estimated hours and costs to complete the project. Recognized revenues and profits are subject to revisions as the contract progresses to completion. Revisions in profit estimates are charged to income in the period in which the facts that give rise to the revision become known. The Company also accounts for certain arrangements under the completed contract method when we do not have the ability to reasonably estimate progress toward completion. To date, the Company has been primarily responsible for the implementation of the software, services have been considered essential to the functionality of the software products, and therefore license and services revenues have been recognized pursuant to SOP 81-1.
For those contracts that include contract milestones or acceptance criteria, we recognize revenue as such milestones are achieved or as such acceptance occurs.

For those contracts with unspecified future products and services which are not essential to the functionality of the other elements of the arrangement, license revenue is recognized by the subscription method over the length of time that the unspecified future product is available to the customer.
In some instances the acceptance criteria in the contract require acceptance after all services are complete and all other elements have been delivered. In these instances the Company recognizes revenue based upon the completed contract method after such acceptance has occurred.
For those arrangements for which the Company has concluded that the service element is not essential to the other elements of the arrangement, the Company determines whether the services are available from other vendors, do not involve a significant degree of risk or unique acceptance criteria, and whether the Company has sufficient experience in providing the service to be able to separately account for the service. When services qualify for separate accounting, the Company uses vendor-specific objective evidence of fair value for the services and the maintenance to account for the arrangement using the residual method, regardless of any separate prices stated within the contract for each element.
Vendor-specific objective evidence of fair value of services is based upon hourly rates. As previously noted, the Company enters into contracts for services alone, and such contracts are based upon time and material basis. Such hourly rates are used to assess the vendor-specific objective evidence of fair value in multiple element arrangements.
In accordance with Statement of Position 97-2, “Software Revenue Recognition,” vendor-specific objective evidence of fair value of maintenance is determined by reference to the price the customer will be required to pay when it is sold separately (that is, the renewal rate). Each license agreement offers additional maintenance renewal periods at a stated price. Maintenance contracts are typically one year in duration.
Arrangements consisting of consulting services. Consulting services consist of a range of services including installation of off-the -shelf software, customization of the software for the customer’s specific application, data conversion and building of interfaces to allow the software to operate in customized environments. Consulting services may be recognized based on customer acceptance in the form of customer-signed timesheets, invoices, cash received, or customer-signed acceptance as defined in the master service agreement.

Customer billing occurs in accordance with contract terms. Customer advances and amounts billed to customers in excess of revenue recognized are recorded as deferred revenues. The majority of our contracts have been accounted for on the completed contract method upon achievement of milestones or final acceptance from the customer.
Short Term Investments
The Company monitors its investments for impairment on a quarterly basis and determines whether a decline in fair value is other-than-temporary by considering factors such as current economic and market conditions, the credit rating of the issuers, the length of time an investment has been below our carrying value and our ability and intent to hold the investment to maturity. If a decline in fair value, caused by factors other than changes in interest rates, is determined to be other-than-temporary, an adjustment is recorded and charged to operations.

Allowance for Doubtful Accounts
We evaluate the collectibility of our accounts receivable based on a combination of factors. When we believe a collectibility issue exists with respect to a specific receivable, we record an allowance to reduce that receivable to the amount that we believe to be collectible. In making the evaluations, we will consider the collection history with the customer, its credit rating, communications with the customer as to reasons for the delay in payment, disputes or claims filed by the customer, warranty claims, non-responsiveness of customers to collection calls, feedback from the responsible sales contact. In addition, we will also consider general economic conditions, the age of the receivable and the quality of the collection efforts.
Contingencies and Litigation
We are subject to various proceedings, lawsuits and claims relating to product, technology, intellectual property, labor, shareholder and other matters. We are required to assess the likelihood of any adverse outcomes and the potential range of probable losses in these matters. The amount of loss accrual, if any, is determined after careful analysis of each matter, and is subject to adjustment if warranted by new developments or revised strategies.
Related Party Transaction and Severance Agreement
In connection with the resignation of Dr. Sanjay Mittal, Chief Executive Officer, the Company agreed to have him continue as Chief Technical Advisor (“CTA”). Pursuant to this arrangement, Dr. Mittal received $20,000 per month for his services and this arrangement would continue until either party terminated the CTA service. During the fiscal year ended March 31, 2005, the Company recorded approximately $220,000 as outside services expenses in general and administration.
In March 2005, Dr. Mittal’s role as CTA was terminated and he received a lump-sum severance payment of $412,500 in addition to the amount paid for outside services. Since the Company believed the payment was estimatable and probable, and the Company therefore, accrued for this amount in September 2003, as compensation expense of which approximately $93,000 was included in the cost of goods sold, approximately $231,000 was included in research and development, approximately $52,000 as a sales and marketing expense and approximately $37,000 was included as a general and administrative expense. In July 2005, Dr. Mittal agreed to provide hourly consulting services relating to the Company’s ongoing patent litigation. Dr. Mittal was paid $27,950 in consulting services for fiscal year ended March 31, 2006. Dr. Mittal is a member of the Board of Directors.

MANAGEMENT DISCUSSION FOR LATEST QUARTER

In addition to historical information, this quarterly report contains forward-looking statements that involve risks and uncertainties that could cause actual results to differ materially from those projected. Factors that might cause or contribute to such differences include, but are not limited to, those discussed in the section entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” as well as in Part II Item 1A “Risk Factors.” Actual results could differ materially. Important factors that could cause actual results to differ materially include, but are not limited to; the level of demand for Selectica’s products and services; the intensity of competition; Selectica’s ability to effectively manage product transitions and to continue to expand and improve internal infrastructure; risks associated with potential acquisitions; and adverse financial, customer and employee consequences that might result to us if litigation were to be resolved in an adverse manner to us. For a more detailed discussion of the risks relating to our business, readers should refer to Part II Item 1A found later in this report entitled “Risks Factors.” Readers are cautioned not to place undue reliance on the forward-looking statements, including statements regarding our expectations, beliefs, intentions or strategies regarding the future, which speak only as of the date of this quarterly report. We assume no obligation to update these forward-looking statements.
Overview
We provide Sales Configuration (SC) and Contract Management (CM) software solutions that allow enterprises to efficiently manage sell-side business processes. Our solutions include software, on demand hosting, professional services and expertise. Our SC products enable customers to increase revenues and reduce costs through seamless, web-enabled automation of the “quote to contract” business processes, which reside between legacy Customer Relationship Management (CRM) and Enterprise Resource Planning (ERP) systems. These products are built using Java technology and utilize a unique business logic engine, repository, and a multi-threaded architecture. This design reduces the amount of memory used to support new user sessions and to deploy a cost-effective, robust and highly scalable, Internet-enhanced sales channel.
Our CM products enable customers to create, manage and analyze contracts in a single, easy to use repository and are offered as an on-premise or hosted solution. Our software enables any and all corporate departments (e.g. Sales, Services, Procurement, Finance, IT and others) to model their specific contracting processes using our application and to manage the lifecycle of the department’s relationships with the counterparty from creation through closure.
Quarterly Financial Overview
For the three months ended September 30, 2008, our revenues were approximately $3.1 million with license revenues representing 5% and services revenues representing 95% of total revenues. In addition, approximately 49% of our quarterly revenues came from three customers. License margins for the quarter were 67% and services margins were 61%. Net loss for the quarter was approximately $3.0 million or $(0.10) per share. For the three months ended September 30, 2007, our revenues were approximately $4.0 million with license revenues representing 27% and services revenues representing 73% of total revenues. In addition, approximately 54% of our quarterly revenues came from two customers. License margins for the quarter were 95% and services margins were 69%. Net loss for the quarter was approximately $17.8 million or $(0.63) per share, including $16.1 million relating to a legal settlement.
Critical Accounting Policies and Estimates
There have been no material changes to any of our critical accounting policies and estimates as disclosed in our report on Form 10-KSB for the year ended March 31, 2008.
Factors Affecting Operating Results
A small number of customers account for a significant portion of our total revenues. We expect that our revenue will continue to depend upon a limited number of customers. If we were to lose a large customer, it would have a significant impact upon future revenue.

We have incurred significant losses since inception and, as of September 30, 2008, we had an accumulated deficit of approximately $246 million. We believe our success depends on the growth of our customer base and the development of the emerging configuration, pricing management, quoting solutions and the contract management and compliance market.
In view of the rapidly changing nature of our business, we believe that period-to-period comparisons of revenues and operating results are not necessarily meaningful and should not be relied upon as indications of future performance. Our operating history has been volatile and makes it difficult to forecast future operating results. This was evidenced by the decline in revenue in fiscal 2008 and 2007.
Because our services tend to be specific to each customer and how that customer will use our products, and because each customer sets different acceptance criteria, it is difficult for us to accurately forecast the amount of revenue that will be recognized on any particular customer contract during any quarter or fiscal year. As a result, we base our revenue estimates, and our determination of associated expense levels, on our analysis of the likely revenue recognition events under each contract during a particular period. Although the value of customer contracts signed during any particular quarter or fiscal year is not an accurate indicator of revenues that will be recognized during any particular quarter or fiscal year, in general, if the value of customer contracts signed in any particular quarter or fiscal year is lower than expected, revenue recognized in future quarters and fiscal years will likely be negatively effected.

Interest and Other Income (Expense), Net
Interest and other income (expense), net consists primarily of interest earned on cash balances and short-term investments along with the impact of currency fluctuations due to valuation adjustments, primarily in our Indian subsidiary. During the three months ended September 30, 2008 and September 30, 2007, interest and other income (expense), net totaled approximately $(0.4) million and $0.8 million, respectively. During the six months ended September 30, 2008 and September 30, 2007, interest and other income (expense), net totaled approximately $(0.6) million and $1.9 million, respectively. The decreases were due primarily to lower cash balances, lower interest rates on our cash and short-term investments balances and unfavorable foreign exchange rate movements against the U.S. dollar.
Provision for Income Taxes
During the three months ended September 30, 2008 and 2007, we recorded income tax provisions of approximately $19,000 and $38,000, respectively. During the six months ended September 30, 2008 and 2007, we recorded income tax provisions of approximately $37,000 and $244,000, respectively. These amounts related to taxes due in foreign jurisdictions and nominal tax amounts for federal and states taxes in the U.S.

Contractual Obligations
We had no significant commitments for capital expenditures as of September 30, 2008. We expect to fund our future capital expenditures, liquidity and strategic operating programs from a combination of available cash balances and internally generated funds.

We have no outside debt and do not have any plans to enter into borrowing arrangements. Our cash, cash equivalents, and short-term investment balances as of September 30, 2008 are adequate to fund our operations through at least the next twelve months.
We do not anticipate any significant capital expenditures, payments due on long-term obligations, or other contractual obligations. However, management is continuing to review our cost structure to minimize non-revenue generating expenses and use of cash as we implement our planned business model changes. This activity may result in additional restructuring charges or severance and other benefits.
As of September 30, 2008, there were no other material changes to our contractual obligations outside the ordinary course of business from those disclosed in our Annual Report on Form 10-KSB for the year ended March 31, 2008.


CONF CALL

Scott Wilson

Good afternoon, everyone. Joining me on today's call are Selectica's Co-Chairs, Brenda Zawatski and Jim Thanos, and Interim CFO, Jim Pardee. Before we begin, I would like to remind everyone that today's call, including the question-and-answer session, may include forward-looking statements regarding expected revenue and earnings per share and future plans, opportunities and expectations of the Company.

These predictions, estimates and other forward-looking statements involve known and unknown risks and uncertainties that may cause actual results to differ materially from those expressed or implied in the call. These risks are detailed in today's press release, as well as in our quarterly and annual reports filed with the SEC, which you're encouraged to review.

Statements included in this conference call are based upon information known to Selectica as of the date of this call, and Selectica assumes no obligation to update this information contained in this call.

In addition, I would like to point out that we will present certain non-GAAP information on this call and refer you to the reconciliation of GAAP to non-GAAP information included in today's press release, which is also available on the Investor Relations section of the Selectica website.

Today, we'll plan to go through the recent quarter's financial result, update you on recent events and changes at the Company and give you our thoughts about what is ahead and what the steps will be.

And with that, I'll turn it over to Brenda Zawatski.

Brenda Zawatski

Thanks, Scott. Good afternoon, everyone. For the first quarter of fiscal 2009, our revenue was $3.8 million compared with a revenue of $4.3 million that we reported the same period one year ago.

In the most recent quarter, the split was 70% license revenue, I'm sorry, 20% license revenue, 37% maintenance revenue, and 43% professional services and other revenue. By business unit, the first quarter fiscal 2009 revenue for sales on the Configuration business was approximately $2.0 million or 52% of the total.

Revenues from our Contract Management Business totaled approximately $1.8 million or 48% of the total revenues. This was a 32% growth versus the same period last year. Consolidated gross margins were 67% in the quarter, with the Sales Configuration business delivering a 74% gross margin and Contract Management delivering a 60% gross margin.

Total operating expenses for the Company were $4.9 million compared with $6.4 million in the prior year period. Excluding charges related to restructuring, litigation settlement and our stock option investigation, total non-GAAP quarterly operating expenses were $4.4 million compared to $4.5 million in the prior year.

Consolidated R&D spending for the quarter was $1.1 million, a slight decrease from the $1.2 million in the same period a year ago. Sales and marketing was $1.8 million compared to $1.9 million for a year ago, and our general and administrative expenses were $1.5 million compared to $1.4 million in the same period a year ago.

GAAP net loss in the quarter was $2.6 million, or $0.09 a share compared to a net loss of $2.3 million or a loss of $0.08 a share in the same period of the prior year. On the balance sheet, we ended the quarter with $33.3 million in total cash, cash equivalents and investments.

As we have said in the past, our customer list is a testament to the strength of our solutions. This quarter, we signed significant new contract management deals with two Fortune 500 companies. One was a world leading online retailer, and the second was a leading developer of technologies for the global marketplace. One of these was initial deployment of a contract management solution, while the other was a competitive displacement.

I believe that the selection of our solutions by these leading global companies validates the strength and leadership of our contract management offering. In addition, Forrester Research has recently issued a report that also reinforces the value our contract management solutions.

I'm pleased by the growth that we see in this business and look forward to the ongoing development and expansion of it.

Now, let's talk about the state of the business. As you know, we've had to make some hard decisions and significant changes for the Company in the past few months. I would like to give you an update on what has taken place and a look at what is ahead for us and what our likely next steps will be.

At the beginning of July, we announced a significant restructuring of the Company. This included making some senior leadership changes in the Company, including the departure of the CEO and General Managers for both of our businesses, as well as the elimination of G&A staff for the Configuration business.

Coincidentally, but unrelated to the restructuring, the CFO left to accept a new opportunity at a much larger company. The timing of these changes reflects in part that the Company has successfully worked through its stock options and patent infringement issues that was been a major overhang on the business. We're now poised to move forward.

While working though these issues, the Company has been making investments in order to reinvigorate its Configuration business and generate new license revenues. In our view, the investments that were made didn't deliver the returns or prospects that were significant enough to continue the -- warrant the continued investment.

While there's never a good time to make major changes and disrupt the business efforts, the Board had heightened sense of urgency and decided to make some hard choices.

Since, we announced the restructuring and leadership changes, we have made significant cuts in our operating expenses, such as eliminating approximately $1 million in annual salary and benefit costs. We have assessed the opportunities for both of our businesses, have refocused our configuration business on the core product and its upcoming release, selectively added revenue generating resources to our contract management business, and are working with an adviser to help us assess unsolicited inquiries for our sales configuration business. We still currently operate two district businesses, Contract Management and Sales Configuration.

There's very little overlap between the two businesses. There's little common code in the solutions. We have minimal leverage of our resources between the two units, and the touch points at the customer level are entirely unique.

Contract Management is typically sold into the General Counsel's office, while Sales Configuration is sold into the sales and operations side of a customer. First, for our Sales Configuration business, we continue to spend a significant amount of time reviewing the business opportunities. We strongly believe that this is a viable business, but have concluded that the solution may be more attractive to customers as part of a broader suite of larger providers, such as Oracle, IBM, or SAP and others. While the Selectica solution is widely recognized as the gold standard for configuration solutions, the larger providers are delivering solutions that are good enough for a lot of customers at the present time. We are working quickly to understand the value of this business.

The investments I have previously made haven't delivered what we believe is an adequate return. As a result, as we announced early in July, we have downsized this business and taken out more than $1 million in annual costs.

We have eliminated spending on marketing campaigns, taken out sales in G&A costs. In addition, we are in the process of selling the building in India associated with this group. We will maintain our Engineering and Professional Services group while taking a critical look at everything else. This makes sense to us because our engineers are the IT for this business and, and Services group is entirely billable and profitable.

At the present time, we're moving forward with a new version release of the Configuration Solution that is expected to be delivered in September. Thereafter, our team will continue to work on future product enhancements and new releases. We have reiterated our commitment to our current customers and have received positive feedback from them on our plan.

I think it's very important to acknowledge the power and success of our Configuration Solution with our customers. For example, at Cisco, we have supported approximately $40 billion of annual product orders for more than 7,000 products and more than 1.1 million product constraints with no configuration errors reported. This is a significant improvement for Cisco, and we believe that they are very pleased with our performance.

Likewise, Bell Canada, we have supported more than $20 billion Canadian dollars in revenue with high throughput for complex configuration and again, no configuration errors.

Overall, we have processed more than $150 billion in orders annually and support more than $1 billion business rolls. The Configuration business currently has a solid maintenance stream from existing customer base. The challenge for this business is generating new license revenue.

Our plan there is to be more optimistic in new sales situations. Most importantly, while we have already moved quickly to make significant changes in this group, we have not ruled anything out for future businesses.

Now, let me talk about the other distinct business, our Contract Life Cycle Management Group. We believe this is already a solid and growing business with tangible, immediate opportunities.

In fact, our recent industry report from Forrester, after a thorough assessment of all competitive offerings from a wide variety of vendors, has validated our solution by naming Selectica as a leader of the pack for its current CLM offering, which is a huge improvement from our previous rating in the bottom half of all vendors back in March of 2006.

We expect to continue to make selective investments in the CLM unit, but at a measured pace with a much more focused effort. Our focus is exclusively on revenue-generating activities that will deliver tangible returns. For example, we recently announced the hiring of David Naughton as the sales VP of this business. David has many years of direct experience in contract management, and his leadership is extremely valuable to us. Similarly, we have added inside sales capabilities to help us extend our customer coverage.

On the marketing side, we redefined and refocused our outward-facing activities so they are best aligned with our sales teams' immediate needs. Going forward, we anticipate additional resources will be hired in India to take advantage of the lower cost workforce and use local currency generated the sale of the building. This will help us save some tax repatriation costs.

Today, we believe the contract management pipeline needs improvement to reduce quarterly revenue volatility. There are new business opportunities that we don't know of and others that we need to be aware of earlier in the cycle.

To smooth out this lumpiness due to the six month sales cycle, we need to constantly refresh our Contract Management opportunities. Once we are engaged in a process, as the Forrester report indicated, our solution is strong, and our win rate is great.

For reasons I have already highlighted, we anticipate that the contract management business will be the growth engine for the Company going forward.

Let's turn to look at next steps. The next steps that we're working on are to dig down into next layer to address the cost structure and to continue to improve efficiencies where we can. Some examples of this are we're relocating our San Francisco facility to a lower cost location that will save us roughly half the rental cost.

R&D growth moving in India, canceling of the Configuration User Group Conference, and more closely monitoring our G&A expenses. We're in the process of determining the future of our Company and haven't ruled anything out. While our assessment is underway, and detailed strategic plans being finalized, we will maintain our existing businesses, continue outstanding customer service and make appropriate investments to ensure continued product leadership.

We are focused on rapidly improving our financial metrics such as top line growth, improving our bottom line results and stabilizing our cash balances. At this early stage, our expectations for fiscal 2009 revenues are not to be significantly different than the previous years. Beyond that, we will not be providing any further guidance at this point.

This concludes our prepared remarks. Jim Pardee, Jim Thanos and I will now take your questions.

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